Another Good Idea Gone Bad

When corporate America discovered outsourcing in the 80’s, it seemed a smart thing to do. Companies could sub-contract many of their support services to others who could do them more efficiently, economically and with greater technological sophistication. Not only were the services better performed, the companies that outsourced were spared the need to divert resources into activities outside their core competencies.

At first, outsourcing was limited to such services as billing, monitoring inventory, devising compensation packages for executives, cleaning offices, factories, and so forth. But then, ingenious corporate managers saw the potential for greater profit: dramatically improved international communication made possible the use of cheap educated labor abroad. The results were mixed. Money was saved, but getting help from someone in Bangalore with an imperfect grasp of English has been frustrating for consumers, to say the least.

Donald Rumsfeld then applied outsourcing on a massive scale to the Pentagon. Again, one could make the case that civilian companies could do a better job or preparing food and cleaning toilets, but soon we had Blackwater’s cowboys wielding guns and shooting Iraqi civilians in the service of protecting diplomats and contractors. Yes, one could make the case, as Rumsfeld obviously did, that the task of protecting civilians is not exactly the same as fighting war, but neither is it so different: the private guards had weapons, the license to kill if necessary, and they were often under attack from a population that could not tell the difference between them and real soldiers. That recipe produced a public relations disaster and, even, serious allegations of war crimes.

Last Monday, The New York Times reported on the “outsourcing missteps” that led to Boeing’s two year delay in producing its new plane, the Dreamliner. “The company’s chief, W. James McNerney Jr., concedes that Boeing lost control of the process by farming out more design and production work than ever and not keeping close tabs on suppliers.” (See “A Dream Interrupted at Boeing.”)

Again, the case can be made, and obviously was, that it was a short step from supplying parts to outsourcing “design and construction” – but it turned out to be a disaster. Richard Aboulafia, an aviation analyst at the Teal Group in Fairfax, VA, noted that “The idea was to get the risk off their books and get other people to do the heavy lifting for them . . . . But the flaw was that led to a kind of ‘engineering light’ approach, and the problems on the 787 can be traced to that.” In other words, Boeing may have thought it was spreading risk and sharing responsibility but actually it lost control: it did not know the problems the sub-contractors were having, it could not intervene in a timely manner, and it lacked the authority to knock heads.

With every expansion of outsourcing there seemed excellent arguments to make: it was cheaper, more efficient, it engaged more people and diffused responsibility. But the obvious risk of losing control was minimized – if not totally ignored. It looked good on paper, the case was rational, but stretched too far it didn’t actually work. Management wanted to believe in it because the financial advantages were great, but, they lost sight of what they could realistically expect of the people charged with carrying it out.

What they didn’t know they knew was that their obsession with minimizing financial risk could end up endangering the whole enterprise.